Under review

Over the past decade panels have defined the relationship between law firms and the major banks. But as the nature of those relationships shifts, panels are becoming even more important

Mark Harding insists there’s been a shift of power. ‘Previously, with a lot of work, the boot was always on the law firm foot,’ Barclays’ general counsel asserts. ‘Now the boot is on the other foot.’ Coming from one of the most senior GCs in the City, head of a 900-strong in-house team with a legal spend of £100m, it’s something to take note of.

Harding feels that much has changed in the last decade as banks have faced tough decisions on legal spend and taken a much more rigorous approach to who they instruct on major mandates. Barclays currently operates a 43-firm panel, which it is set to review at the start of 2011.

A cluster of financial institutions, including Lloyds Banking Group, Nationwide Building Society, Ireland’s National Asset Management Agency (NAMA), HSBC, Citigroup and Standard Chartered have just completed panel reviews. Others, such as Deutsche Bank and Bank of America Merrill Lynch, are poised to finalise theirs. Landing a spot on a panel, at times a ferocious process, has never been more crucial.

For the world’s financial institutions, the post-Lehman reality is that budgets have been slashed, in-house teams at the banks reduced and legal spend scrutinised like never before by bank executives. This poses a unique set of issues for GCs.

Facing consolidation across the sector and heavy-handed regulation, the banks now have the task of paring down their external advisers to ensure they get the best firms, while spending as little as possible.

There is no doubt that the relationship between the banks and firms has fluctuated significantly, with the banks currently having the advantage. For some firms, particularly below the Magic Circle, it’s a very tough new reality.

Once upon a time

‘The panel is king,’ insists Simmons & Simmons banking partner, Simon Middleton. It’s become the accepted summary of how the relationship between bank and law firm has evolved over the past decade. But panels weren’t as exclusive as they might have first appeared. As the volume of financing work coming out of the banks swelled, so did the panels. Barclays, notorious for having one of the largest panels of all the banks, appointed 31 firms to its list of preferred advisers in 2005, while The Royal Bank of Scotland added 18 firms to its panel a year later.

In 2006, Lloyds TSB, which had an estimated legal spend of £30m at the time, launched its first panel, appointing ten firms to cover the bank’s corporate, capital markets, structured asset finance, large London transactions and large commercial work. The bank tailored its roster of advisers along the same lines as RBS, divvying up its preferred advisers by litigation, property, general legal and recoveries.

Allen & Overy, Clifford Chance and Linklaters dominated the top end of the major banking relationships, but lucrative streams of work also flowed to the mid-market and national players.

The proliferation of financing tools paved the way for firms like Berwin Leighton Paisner, SJ Berwin and Simmons & Simmons to buy into a market where previously they had limited exposure. The market was under-lawyered and firms went on hiring sprees to boost numbers. Chargeout rates rose with the market, with a raft of firms sending in troops of associates to handle deals.

‘Before the credit crunch, it was a lot easier to pay legal fees while your profits continued to rise,’ comments Matthew Kellett, formerly at RBS and now head of finance at BLP.

‘Banks have become more professional in their control over outside advisers. It’s difficult to get work off-panel.’
David Ereira, Linklaters

As the financial grip on the banks tightened during the banking crisis, legal spends were cut. This kick-started a new wave of scrutiny on the work lawyers were doing, while at the same time hammering firms down on fees.

‘Inevitably the pressure put on my GCs was translated into legal spend,’ says Harding, who has been at the forefront of establishing innovative ways to cut costs. ‘We had to look hard at where and how more work assigned to law firms could be done more efficiently.’ Barclays’ £100m legal spend felt the same weight as its peers.

Harding was one of the first GCs to publicly voice the difficulties in-house teams were experiencing when he launched the six-month review of the bank’s panel at the start of 2009. At the time, he said he would focus more on how firms priced their services and what ‘added value’ they would lend to their relationship with the bank.

Barclays launched an e-billing system that would see the bank cut costs, while suggesting that firms pitch for work using a ‘fixed-fee’ proposal on transactional work in a bid to control spend.

RBS soon followed, with the bank’s GC Chris Campbell asking firms vying for spots on its 2009 panel to agree to a 10% discount on 2006 fee levels. In the same year Lloyds asked its advisers to agree to a 20% discount on hourly rates.

‘The banks became more and more focused on procurement [of legal services] and costs,’ comments banking partner Chris Kandel at Latham & Watkins of the changes.

But it didn’t stop there. Like Barclays, each bank took a tougher view on the services its legal advisers provided, as the boardroom pressure to justify legal spend intensified. Calls for greater teams of secondees to help fill the holes left by mass redundancies became the norm – Linklaters, for instance, currently has 10% of its London banking associates on secondment. Increasing demands for staff training by external advisers also made its way on to the list of requirements each panel firm had to agree to. And, of course, all panel firms signed up to a no-sue clause.

‘They looked at pricing and what else you can add; and the more you can add, the better,’ notes Ken Baird, head of restructuring at Freshfields Bruckhaus Deringer. ‘There has been a gradual slimming down of the panels, the banks are much more structured in the process,’ he adds.

Procurement teams within banks’ business development divisions are now a key part of most panel reviews. The tougher market has led to panels being slimmed down. Building society Nationwide, in a recent review of its panel, cut the number of firms it uses from 60 to 17, while Lloyds (as a combined entity with HBOS) also shed some legal weight, retaining 11 firms, down from a possible 14.

If your name’s not down

The focus now turns to the banks that have started reviewing panels and, in some cases, are launching panels for the first time. Traditionally, banks outside of the UK haven’t operated panels. US investment banks, for instance, have typically turned to a shortlist of preferred advisers.

Deutsche Bank, which is one of a handful of international banks currently reviewing its panels, gives the lion’s share of its work in the City to A&O, CC, White & Case, Latham & Watkins and Linklaters. The review could see that change as the bank’s new GC, Emma Slatter, is said to be focusing more on cost-cutting.

The German banking giant is reviewing its terms with panel firms, including the right to refuse payment on an aborted deal and a limitation on expenses it will pay. Deutsche Bank, which uses an online tendering system called ‘Click for Legal’ for firms looking to win work, separates itself from the rest of the pack as it uses over 100 firms and has a strict agreement with its close advisers that it can instruct off-panel whenever it wants.

Similarly, Bank of America Merrill Lynch is also conducting a review of its external advisers, marking the first time the merged bank has set up a panel. Firms looking to win a panel place sign up to a list of mandatory measures, including no payment on aborted deals, associate chargeout rates at paralegal levels and regional discount models. The process is being run out of the bank’s New York base, with deputy GC Bill Caccamise running the show.

‘We had to look hard at where and how more work assigned to law firms could be done more effectively.’
Mark Harding, Barclays

Japan’s Nomura has also launched a review of its panel, the first after its takeover of Lehman Brothers’ European and Middle Eastern equities business. In 2008, the bank turned to a roster of seven firms, including A&O, Linklaters, Freshfields, SJ Berwin, Ashurst, Osborne Clarke and Norton Rose. At the time of going to press, it was understood that the review has seen the bank re-instruct former adviser Clifford Chance. The Magic Circle firm was originally kicked off the panel because of a conflict involving Terra Firma, the private equity fund set up by Nomura’s former head of principal investments, Guy Hands.

In the UK and Ireland, Barclays Capital, Allied Irish Bank and Bank of Ireland are reported to be undergoing reviews at the moment. Harding is preparing himself for the January launch of the review into Barclays’ mammoth panel. ‘We refine and streamline our panel at each review’, he says. In advance of our process in 2011, we will be actively working with existing panel firms to gain an understanding of best practices and also to improve the process.’

One of the ideas that he is increasingly keen to promote is to have panel firms working together on a transaction or sharing the work. He is also considering outsourcing commoditised work, like standardised form templates. The new panel should be finalised by next summer and could see the bank cut one or two firms.

‘Banks have become more professional in their control over outside advisers,’ insists Linklaters finance partner David Ereira. ‘The panel is important now because it’s difficult to get work off-panel. It is very important for lawyers to realise how a bank’s spending has evolved.’

In the heady days leading up to the global banking crisis, banks were happy to instruct firms off-panel. ‘The old approach in the boom times was that there was a more informal process for who was instructed by the banks,’ explains Dublin-based finance partner Nollaig Murphy at Maples and Calder, one of the many firms to make it onto NAMA’s panels. ‘Panels weren’t token and it was clearly easier to get work if you were on one, but it wasn’t a blocker if you weren’t.’

Meanwhile Kellett, who left RBS’s financial structuring group in 2009, says that panels often weren’t enforced. ‘Post-credit crunch, it’s a different picture,’ he says now. ‘It is much more difficult for group legal to allow a non-panel firm to advise off-panel, given the material discounts panel firms agree to give. This is why, on the whole, panel arrangements are much more strictly enforced.’

Before the banking crisis, law firms had much more of a say in dictating how they’d staff a deal and what fee rates they’d charge. But with the shift in the landscape, the banks are now making the rules on prices and the terms of relationships.

The panel relationship has become key in all aspects of the sector and has its knock on effects in the recruitment market. ‘I can move finance partners,’ comments Jason Horobin of recruitment giant Laurence Simons. ‘But they have to have the panel relationship or a book of business that does not rely on investment banks.’

The few firms looking to hire finance partners won’t look at candidates unless they have panel relationships, while some partners are hesitant to move to firms that don’t have a spot on a panel.

Dominic Griffiths, head of finance at Mayer Brown, notes that, when his firm was recruiting into its finance practice last year, a panel relationship was one of the key factors in deciding which partners they’d hire. ‘We had to ensure that we were bringing in people that were not only well known to our core clients, but would also fit into the firm’s culture,’ he says.

Some you win

To the Magic Circle, this is business. A&O, CC, Linklaters, Freshfields and, in some cases, Slaughter and May all sit comfortably on just about every major panel, including that of Ireland’s bad bank, NAMA.

Clifford Chance has scored spots on every major banking panel after the firm was understood to be re-appointed to Nomura’s roster of advisers. ‘As a firm you want to be a one-stop shop, because banks want us to know everything. It’s the depth of quality and resources that makes us attractive to clients,’ explains partner James Johnson.

And while the Magic Circle is relatively unfazed by the squeeze on fees, beneath sentiment is more frustrated. There is a common feeling among mid-tier firms that the relationship with the banks has become de-personalised.

‘Law firms loathe the panel process,’ grumbles one partner at a leading City practice. ‘We have to jump through hoops and offer services they don’t bother using. We do seminars, people don’t show up. Secondees never lead to other work. It’s basically free labour.’

‘There has been a gradual slimming down of the panels, the banks are much more structured in the process.’
Ken Baird, Freshfields Bruckhaus Deringer

But the recession has produced some winners. Mayer Brown’s heavy recruitment into its banking and finance practice last year, which saw the firm add seven new partners, has landed the firm a spot on Lloyds’ new look panel.

As the market has evolved, the separation between the Magic Circle and mid-tier firms has become more marked. SJ Berwin, White & Case, SNR Denton and Ashurst are seen by their peers to have lost market share, either because they’ve lost out on bidding wars for work or because they’ve lost partners.

Last year, White & Case took a hit when Chris Kandel, along with three other partners, jumped ship for rivals Latham & Watkins, taking solid relationships with the likes of Deutsche Bank with them. There’s also been some movement in the mid-market, with SJ Berwin losing its finance heavy-hitter Stuart Brinkworth earlier this year to Hogan Lovells.

The reality today is that the push for panel appointments is more crucial than it ever has been. Firms with the right stock will find it relatively easy to secure panel appointments, therefore it is no surprise to anyone in the market that the Magic Circle has excelled.

‘We call it the corridor of predictability… both sides of a restructuring need lawyers who will act in a sensible and hence reasonably predictable way,’ says Baird. ‘Banks like to see sensible faces on the other side of the table in restructurings.’

Although the banking market has changed considerably since the fall of Lehman Brothers, the banks seem to have reverted back to their trusted advisers at the top of the Magic Circle. ‘The panel appointment is like being handed a key, but, once you’re inside, then you’re on your own,’ says Johnson. For many firms unlocking the door has never been more challenging. LB